The digital disruption of the music industry has been widely touted as the toppling of major labels by digital insurgents, yet major labels remain at the center of the industry. In all industries, digital technologies are enabling challengers to contest incumbents with new business models that bypass the centrality of a product in creating value and growth. From its earliest days, the recorded music industry revolved around a product: sheet music and cylinders, then records, then CDs and eventually downloads. Napster dealt the first digital blow; file sharing meant consumers no longer had to buy or own a music product to listen. Major labels took legal action, but the impact could not be outlawed. U.S. recorded music revenues peaked in 1999, the year Napster launched.
Steve Jobs seized the moment with iTunes and the 99-cent song. But even downloads have been unable to check the sales decline of music products. Streaming has overtaken the music industry as the engine of growth. Streaming is not another product. It is a business model that uses digital technologies to sell music as a service, meaning access without ownership that is available on-demand and paid for by use or by subscription. The two biggest services are Pandora, a personalized radio service, and Spotify, offering a catalog of music.
Service-based offerings are not new, but technology has made it possible for such offerings to make inroads into categories that have long been exclusively product-centric. Digital disruption does not reward traditional centers of power. It re-channels the flow of industry revenues. Unless incumbent brands give up old ways of operating, new sources of value and growth will elude them because the new flow of revenue will not renew existing streams or automatically redirect new streams to incumbents. Consumers can get the benefits they want in new ways. The old ways aren’t coming back.